Saturday, February 21, 2009

In the wake of the Madoff scandal, it is only a matter of time before the Fund of Funds industry disappears, as investor anger grows at the glaring failure of Fund of Funds' primary responsibility - due diligence. Fund of Funds are currently perceived as worthless middle men between hedge funds and investors, pocketing 1% management fees and 10% incentive fees for arguably doing no work whatsoever. So as the investment industry contracts and Fund of Funds do all they can to stay around for a few more quarters, it makes sense to take a look at some entities that few have considered: the state pension and retirement funds. Notable among these are the California Public Employees Retirement System (Calpers), The Teachers Retirement System of Texas (TRS), the Orgeon Public Employees Retirement System and the granddaddy of them all: The New York State Common Retirement System and the New York State Teachers Retirement System. Which brings us to an interest point. As the financial system collapses and states' budget deficits skyrocket, the lives of citizens are about to get very ugly as legislators' only options are to cut state employees (i.e. police officers, healthcare workers and educators) and raise taxes through the roof. One need look no further than California which is on the brink of collapse, as absent federal assistance, it will be unable to fund its $42 billion state deficit. New York is in no better position, and David Paterson has had numerous media appearances attempting to warn New Yorkers just how difficult lives in the state are about to become. In the meantime, public workers, current and retired, of troubled states will shortly begin receiving very disturbing news, as their pensions and benefit packages are about to be drastically reduced if not eliminated altogether. The culprit? The falling market.

New York State Retirement System

At the market's peak a little over a year ago, the two principal funds that New York uses to invest retirement money, the New York State Common Retirement System and the New York State Teachers' Retirement System, had equity assets valued at over $120 billion. Since then the value of assets in these funds has plummeted and is currently at a little under $60 billion, a 50% decrease! This, unfortunately, is the pattern with all other state retirement funds, which have suffered comparable losses over the past year. The top 20 stock positions of the two New York State pension funds are listed below (holdings are presented on a combined basis). And if the drubbing of financial stocks continues, it is very likely that the value of these top holdings, which have traditionally accounted for about a third of the total funds' values, will likely continue dropping, due to the prominent positions held in both JP Morgan and Wells Fargo.

However, direct investing in stocks does not make the pension funds "Fund of Funds" per se: at most it makes them bad mutual fund-type stockpickers. And state pensioners will have ample opportunity to voice their displeasure with the performance of the funds' Chief Investment Officers, Robert Arnold for the Common Retirement Fund and George Philip for the Teachers Retirement Fund.

What is more curious is an often missed page in the Office Of The State Comptroller's website (link here) in which the New York State Common Retirement Fund discloses its monthly indirect investment in other asset managers, be they private, public equity or real estate focused. Compiling the publicly available data from February 2007 yields some curious results. Turns out in 2007 the New York Common Fund invested over $5.9 billion directly into a plethora of other hedge and private equity funds, and a total of $7.3 billion net invested over the past 2 years. Some curious names that stand out:

Guggenheim, which received $100 million in May 2007 and a total of $500 million, and which has since shuttered;

Bear Stearns, which received $20 million in June 2007, after the blow up, only to see a the entire investment (including previous installments) of $490 redeemed in August, likely at a great loss;

The investment of $415 million in 24 assorted office properties in October 2007 (peak of the commercial real estate market) through a JV with Liberty Washington;

Apollo's latest Investment Fund (VII), which received $350 million in August 2007, which somehow closed in late January with $15 billion in total commitments. Looks like New York ignored the stellar performance of the prior fund, in which most leveraged buyouts are currently bankrupt or on the verge;

BlackStone Real Estate Partners VI, in which the fund invested $800 million, and which closed in March 2008 with total commitments of $10.9 billion. Blackstone Real Estate became famous for its bidding war for the Equity Office Properties REIT which it won at the peak of the market with a final purchase price of $39 billion, and in which it invested almost $4 billion in equity, only to flip most of it to pay down the associated debt; they are likely stuck with the balance at a significantly underwater valuation.

Harbinger Capital Partners, which received a $71 million investment from the fund in 2007, and which is likely worth roughly 60 cents on the dollar;

Cerberus, which received $50 million in May 2007, and which might very well have been immediately funneled into such sterling investments as Chrysler and Aozora bank;

GoldenTree, which received $35 million in 2007, and is now running dutch auctions to offload all its illiquid holdings;

Xerion, which received $13 million in 2008, months after it was acquired by Perella Weinberg. As we have written, Joe Perella is probably the most important financial advisor in the country currently, advising the FDIC on its assorted activities (with very little information on how the process is compensated). If New York is invested in a fund which is run by a firm compensated by the FDIC, the potential conflict of interest here, absent further disclosure, could have massive proportions.

This is not to say that The Common Fund has only had horrendous indirect investments. In 2007 the Fund also invested $5 million in Paulson's Fund (followed by $48 million in 2008), $150 million in Chelsea Clinton's former employer Avenue Capital, and $12 million in Izzy Englander's Millennium Partners, which seem to believe in generating CD type returns with no down month as far as one can remember. The full list of fund recipients is presented here as per the data on the New York State Comptroller's page.

A Little Too Much Affirmative Action?

Following the Spitzer fiasco, and David Paterson's appointment as New York Governor, there was a marked shift in the investment targets of the Common Fund. Beginning in March of 2008, the biggest recipient of funding, by a very wide margin, were funds that are defined in the Monthly Transaction Reports as "minority-owned firms." In fact, David seems to be such a supporter of minority-led hedge funds, that in 2008 more than half of the $1.4 billion invested in assorted asset managers went to minority-owned companies, $760 million to be exact. Which implies that the only way to get startup funding these days, with traditional avenues closed, may be to apply to the New York Common Fund and check the non-white box.

The Upcoming Pension Mess

Pension funds' calculations for actuarial purposes presume a roughly 8% annual growth in perpetuity, the result of which funnel through into the over- or under-funding estimates for a State's budget for any given period of time. The current dislocation implies that absent an approximately $50 billion injection of new capital, New York's Pension Funds are guaranteed to be unable to keep up with increasing cash outflow requirements. As we mentioned, New York is not alone in this predicament, with all major public employee reitrement funds currently down anywhere between 40% and 50%. While public anger is still focused merely on the huge deficit in the state's income statement, soon all hell will break loose when millions of current police, healthcare and educational retirees realize they will have go back to work as their pensions disappear. The speed of the market's collapse will determine how quickly that day comes.

Friday, February 20, 2009

We have discussed the nature of the negative basis phenomenon at length previously, and judging by recent observations in the cash and synthetic market, it is evident that it is only a matter of time before this spread collapses dramatically, resulting in huge windfalls for accounts who establish basis positions currently ahead of a significant convergence in spreads.

As the below chart indicates, the basis has recently bottomed in both IG and HY names and has gradually commenced normalizing. Granted, assuming Citi and/or BofA are nationalized, it is possible to experience yet another risk flaring mostly due to liquidity considerations, which is why it is important to gauge for financially systemic events as basis trades are established.

Recent initiatives by the Fed, while unable to slow the dramatic decline in most macroeconomic indicators, have brought new life to the credit markets, where funding costs (for the survivors) have dramatically improved. Our weekly compilation of DTCC data shows that the notional and contractual value of CDS trades has been increasing over the past month and a half, by far the best proxy that accounts are getting back in the game. And due to the increasing economic risks, the default expectations will only increase, leading to accelerated hedging of bankruptcy risk via short risk synthetic positions.

2. Increasing risk of CDO unwinds.

We briefly touched upon the topic of CDOs and how they are closely intertwined in the fabric of the CDS world. More relevantly, AAA CDO tranches would be downgraded after a relatively small amount of IG fallen angels. Between 2006 and 2008 about $160 billion of CDO tranches (7%-15% range) were issued, which is the risk adjusted equivalent of $400 billion in notional of US and European collateral. And unlike junior and mezz tranches, the AAA tranches have been resilient (so far) to market volatility. Inevitably, downgrades and more MTM losses will generate more unwinds, which in a feedback loops, would only generate more losses and further unwinds, as previously discussed. The implication is single-name CDS spreads will widen and stay there for a long time.

3. CDS Clearinghouse will eliminate counterparty risk.

The imminent launch of a central CDS clearinghouse will increase margin posting requirements, but eliminate counterparty risk. Higher margin will have the impact of discouraging protection sellers as it will decrease the embedded leverage of running spread protection selling, while the overall improved robustness of the CDS market will encourage protection buyers and hedgers to return. Ultimately, this will also result in wider CDS spreads.

A relatively risk-free recommendation based on these assumptions is to purchase the following basket of investment grade negative basis opportunities (or alternatively to purchase the CDS outright, depending on risk tolerance). Below we present a robust and diverse selection of highly-rated (BBB thru A), and attractively priced bases. The median negative basis for the basket is at 384 bps, implying a basis convergence to 0 on a $100 million notional at a roughly $3,000 DV01 would result in positive P&L of $11.5 million, while picking up almost 4% in carry. Granted, this looked attractive to Boaz Weinstein as well, however, to generate the above return he needed to lever over ten fold, whereas the current market dislocation presents an impressive IRR on a purely unlevered basis.

(disclaimer, Zero Hedge has no current positions in either cash or synthetic credit instruments)

Number 14 for the year, and the second one for Oregon in a week, is Silver Falls Bank in Silverton, Oregon. Citizens Bank of Corvallis, Oregon will assume all the deposits of Silver Falls. The bank most recently had total assets of $131 million and total deposits of $116 million. The FDIC cost from this failure will be $50 million. The FDIC has graciously provided a phone number where investors should call before they proceed with the ritualistic Saturday morning run on the bank (1-800-760-3639). If anyone is calling them, could they please get some clarity on how the expanded $100 billion Treasury line of credit is supposed to guarantee the $13.6 trillion of bank assets the FDIC oversees, cause we can't quite figure it out.
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We wrote yesterday about some technical considerations which resulted in the 25% drop in Aleris' DIP trading price in the secondary market post break. Debtwire picks up the theme today, and discloses some other pretty ghastly information that was previously not widely known. Turns out the company provided projections to lenders which disclosed that company EBITDA in 2009 would be a meager $100 million, significantly below the $300 million LTM number through Q3 2008. And, according to analysts, even the $100 million number may be a stretch. As the DIP itself will consume $190 million in interest expense and $75 million will be spent on capital expenditures, the $100 million in EBITDA would result in a cash burn of at least $165 million. Additionally, the credit metrics for the DIP are ugliness personified, at 10.75x thru the ABL DIP ($1,075 million of new DIP) and 15.75x thru the pre-petition roll up portion of the DIP (total DIP size is $1.575 billion as we reported previously).

A lender who is punching himself in the face now for throwing more money down the garbage chute said "There is a general view the DIP was put together very hastily, before people had a chance to sit down and dig into the numbers, do sensitivity analysis. They hit a critical wall and all people were worried about was putting together some liquidity... once people had time to digest the size of the dip, they are looking at the leverage and what they're going to do for EBITDA."

If one applies a current prevailing industry multiple of 5x to the $100 million EBITDA number, the implied Aleris enterprise value is no more than $500 million, implying the DIP lenders will likely soon be equitized at a loss yet again (comparable Kaiser Aluminum is currently trading at about 5x forward EBITDA). It also means a fair trading price for the Aleris DIP should be no more than 50 cents on the dollar for the ABL portion.

Seeing how Oak Tree and Apollo backstopped the new money DIP term loan, it is not surprising why there was a rush to get the deal done with little to no disclosure. We hope Apollo managed to offload its portion quickly as all they need now is more bad investments, especially secured debt losses in someone else's private equity deal gone wrong... they have enough of their own.
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Come on, these guys are still around? I thought they shut down for good after they lost billions last year... Apparently there were some investors left who were stupid enough not to realize what a money losing proposition the house of Dondero is. Bloomberg reports that Highland's CDO fund is the latest casualty due to "the unprecedented market volatility and disruption to the financial system, and the market for structured products assets in particular." Has there been any hedge fund that has not blamed the market for its downfall? Curiously, while every weird name in the dictionary has already been used extensively in hedge fund nomenclature, no one has been smart enough to found Buy High Sell Low Capital LLC.

The CDO fund, which Barrons's brilliantly ranked among its top 50 funds with annual returns of 44.12% which would even make Stanford and Madoff blush, became terminally insolvent in recent weeks and was shut down with its assets valued at just $362 million after being worth "billions" very recently. Which makes us wonder when will the regulators go after the peculiar marking methodologies used at hedge funds, which show everything as worth 100 cents on the dollar until the actual liquidation date, when somehow overnight things receive a 99% discount.

Highland was a big pioneer in the CDO business, issuing $3.2 billion in CDO securities in 2005 and $8.5 billion in 2006, and even had the gall to IPO its CDO business. Luckily investors were spared after the IPO was later pulled.

Oh and by the way, if you are an investor, don't wait to get redemptions... as in any redemptions. Turns out the opportunity fund’s liabilities exceeded the value of its assets “to such a degree” that there won’t be anything left to satisfy unpaid redemptions to shareholders or make distributions to current investors, according to the Feb. 4 letter.

We are certain losing his investors' livelihood will cause Highland founder Jim Dondero to have at least one sleepless night.

Failed fugitive and successful criminal mastermind Allen Stanford, together with his wife Susan, who may or may not be the "girlfriend" he was with during his Virginia capture, owes the U.S. $104.2 million in back taxes, more than double the previously reported amount of $56 million, according to tax liens filed on Texas and Florida properties. Stanford had previous IRS tax issues in 1997, when he lost a tax court case in which he was found guilty for not filing a 1990 tax return and owed $442,000 in taxes related to his ownership of Guardian International Bank, a bank he had set up in the British West Indies. Hilariously, Stanford claimed he failed to file tax returns because records were destroyed by hurricane Hugo in 1989, yet that had not prevented him from filing a 1989 tax return.

Stanford, who believes the best defense is an offense so retarded your enemy's brain turns to mush, sued preemptively the IRS to contest the agency's contention that he and his wife "itemized deductions improperly, wrongly classified capital gains as losses, and attempted to carry forward more than $4.1 million in net operating losses in violation of tax laws."

If Sir Stanford had not ended up getting all caught up in running some small time Ponz, he would definitely have been the number one contender for the position of Secretary of the Treasury.
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S&P, which has recently improved from lagging by 3 years to being behind by only a month or so (amazing considering Moody's believes it is still in the 19th century), downgraded Clear Channel From B to B-, and kept it on CreditWatch Negative, expecting further downgrades. As we wrote on February 10, the surprising draw down of CCU's credit facility should have raised numerous eyebrows. In a uncharacteristically harshly worded statement, S&P goes to town on demolishing any non bankruptcy credibility Clear Channel thinks it may have.

The ratings downgrade and continued CreditWatch listing reflects our deepening concerns about the company's ability to maintain compliance with financial covenants amid the worsening recession, especially in light of extremely weak recent results reported by peer radio and outdoor companies. Under our baseline scenario, including our assumptions regarding possible covenant add-backs under Clear Channel's credit agreement, we estimate that the company could violate covenants in the second half of 2009, or sooner if EBITDA declines are greater than our expectations. This scenario contemplates EBITDA declines in the 40% area over the next several quarters, with declines moderating toward the second half of the year. Our downside scenario contemplates EBITDA declines in the 40%to 50% range over the near term. Under our baseline scenario, EBITDA coverage of net interest could decline to less than 1x. For this reason, if the company were able to obtain an amendment from bank lenders, we believe it would need to use cash balances to meet any potential upfront fees and increases in interest rate spreads.

For the first half of 2009, the company faces more difficult year-over-year comparisons at its outdoor business, as this segment didn't show the same level of comparable weakness in local advertising as other media until the third quarter of 2008. Due to the longer-term nature of contracts, we believe the outdoor business could show a slight lag in recovery as well, even after economic conditions improve. In addition, we are concerned that negative secular trends facing the radio industry could limit a rebound in 2010.

Pro forma for the company's subpar tender offer completed on Dec. 23, 2008, balance sheet debt to EBITDA was very high, in our view, at about 9.6x as of Sept. 30, 2008, up from 9.4x at June 30, 2008. Our calculation of lease-adjusted total debt (capitalizing both operating leases and minimum franchise payments associated with outdoor, and including third-party debt, guaranteed letters of credit, and acquisition-related earn-out payments) to EBITDA was still higher, at 10.6x. Pro forma for the company's full drawdown of its $2 billion revolving credit facility, fully adjusted leverage climbs to a steep 11.4x. For the 12 months ended Sept. 30, 2008, the conversion of EBITDA to discretionary cash flow was still good, in our view, at 48%. For 2009, we believe that discretionary cash flow could turn modestly negative, eating into cash balances.

Liquidity

Pro forma for the drawdown of its $2 billion revolving credit facility, Clear Channel derives its liquidity from cash balances and modest discretionary cash flow, which we believe could turn negative in 2009 under continued EBITDA declines. As of Sept. 30, 2008, the company reported $244 million of cash on hand, which doesn't include the $1.6 billion drawn from the revolver on Feb. 6, 2009. Borrowing capacity of $250 million on the company's receivables-based credit facility also provides liquidity.

Financial covenants in the senior secured bank facility include an initial maximum leverage ratio of secured net debt to adjusted EBITDA of 9.5x, beginning in the first quarter of 2009. The covenant will remain at 9.5x through the first quarter of 2013. As of Sept. 30, 2008, we estimate secured net leverage at roughly 6.0x, but are concerned the company could violate covenants in the second half of 2009. Near-term maturities include $500 million of 4.25% notes due in May 2009, and the remaining balance of the 7.65% notes due in 2010--both of which we would expect the company to meet with its committed delayed-draw term loan (DDTL). The company has the capacity under the DDTL to redeem these maturities at par. We expect the company to use cash to pay at maturity the $250 million of 4.5% notes due in 2010. The next sizable maturities are in 2011, at roughly $946 million, which we believe could prove challenging depending on the state of the credit markets and economy.

Bank Of Countrywide Lynch memo leaked: Ken Lewis was last seen claiming that the bank does not need further assistance, and that it can survive the downturn on its own. He goes on to say how good the economy is, how the trading business has "vastly improved" in the quarter, how the corporate debt has shown signs of thawing, and how critics and cynics will soon be sued for shorting the stock and spreading malicious rumors (we kinda made that one up...although it could very well happen)

If the whole corporate debt pick up is really the case, maybe BAC can (try to) issue some non-FDIC insured paper... How about it?

Somehow this is causing the stock to pop again...

Oh well, damage control at 3:50 pm on Friday is always a good preamble to a stress and nationalization free weekend.

*******************

Full Memo below:

To my teammates:

Public debate on the subject of potentially nationalizing some banks continues to put great pressure on our stock. And yet, our company continues to be profitable. I see no reason why a company that is profitable, with capital and liquidity levels that are very strong, and that continues to lend actively, should be considered for nationalization. Speculation about nationalization is based on a lack of understanding of our bank’s financial position as well as a lack of appreciation for the adverse ramifications for our customers and the economy.

Bank of America does not need any further assistance today, and I am confident we will not need any further assistance in the future. I believe our company has more than enough capital, liquidity and earnings power to make it through this downturn on our own from here on out.

There is no question that the recession is continuing to worsen and that rising credit costs will continue to put great pressure on our ability to generate earnings. But here’s the good news: Your hard work is producing results in businesses all across the company.

While I can’t divulge any specific financial results mid-quarter, I can tell you that activity in our trading business continues to be vastly improved over last quarter. The corporate debt markets are showing some signs of thawing in both high yield and high grade, and we’re already seeing some benefits in the market of our combination with Merrill Lynch, in terms of winning mandates to raise capital for new and existing clients. And Merrill Lynch Financial Advisors posted nearly a half billion dollars in CD sales in the first four weeks these products were available to their clients.

On the retail side, our customer satisfaction scores are up at a time when others are down. Our brand, which took a beating in January, strengthened in early February, as customers gave us high marks for trustworthiness and perception that money is safe with us. In the first week of February, our Go America, Save! promotion boosted CD sales 18% and IRA sales 10% over the prior week. We extended our industry record this week for number of active mobile banking customers, surpassing the 2 million mark. And this week, a consortium of banks, including Bank of America, launched the Help With My Credit campaign to raise awareness of the different ways credit card issuers can assist customers in managing their financial obligations.

I am really encouraged by what we’re seeing in our home lending business. The mortgage boom is so intense we actually pulled down some advertising for a brief period to give our teams a chance to catch up to the volume, but they are running at full tilt now and processing record volumes. Our decision to acquire Countrywide has put us in a great position to capitalize on the surge in this business. This is a very positive story as we lead up to the launch of our new Bank of America Home Loans brand in April.

Yesterday, I met with a group of about a hundred of our top leaders to discuss what’s going on in the businesses and listen to their thoughts and concerns. We talked about the great challenges we’re all facing in the marketplace. But we also talked about how encouraging it is to work with such strong teammates, to have the trust and support of our customers and clients, and to have the position in our markets that we do.

As we concluded the meeting, I told them that we have a clear challenge in front of us: to prove the cynics and the critics wrong. I know we can do that – in fact, I think we’re doing it now, in the work each of you is doing every day, and the business results you’re putting up on the board.Thank you for that. Let’s keep the momentum going.

Kirk Kerkorian, through his holding Company Tracinda Corp today announced in a 13G regulatory filing that he was pledging an additional 48.8 million of his personal MGM shares as collateral under MGM's $500 million credit line, which he had used to buy Ford Motor stock. Kirk/Tracinda has now pledged his entire MGM equity stake of 148.8 million shares (54% of the company float). This action goes to show just how intertwined bad bets can be within a holding company's equity structure especially when leverage is involved. Kirk's misguided Ford bet was one thing, but having leveraged it with his crown jewel holdings, and especially if MGM stock keeps dropping, it is inevitable that Kirk will face stern margin calls, and may likely be forced to part with his legendary Vegas property. This could be just the event that Penn Gaming is expecting, as it awaits to snap up the MGM and associated properties for a bargain basement price.

Chris Dodd's brilliance shone today, when he claimed that "short-term bank takeovers" may be necessary... uh???????? Short term nationalization? This is worse than little kids playing Dungeons and Dragons, coming up with rules on the fly. Unfortunately if they roll, well, poorly, on that cool 20 side die, U.S. taxpayers will end up bankrupt or worse.

“I don’t welcome that at all, but I could see how it’s possible it may happen [sic],” Dodd said on Bloomberg Television’s “Political Capital with Al Hunt” to be broadcast later today. “I’m concerned that we may end up having to do that, at least for a short time.”

“I’m sort of stunned in a way that some people are reacting the way they are about all of this,” Dodd said. “At a time like this, everyone needs to pull in the same direction.”

Dodd also said he doesn’t want U.S. automakers to go through a prepackaged bankruptcy or a “forced merger.” General Motors Corp., Ford Motor Co. or Chrysler LLC risk liquidation with such actions, Dodd said on the broadcast.

The only good thing out of all this is that reality is not defined (not yet) by Dodd's ludicrous perspective on life, the universe and everything else. But better not risk it - so don't you go pissing off Chris, or he will i) make sure your bonus is $1 dollar in perpetuity, and ii) make it illegal to sell any securities. Ever.
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Fresh out of Rochdale, the disgruntled former Ladenburg employee and Bank of America cheerleader claims that a wholesale nationalization of all Lewis, Vikram et al. toxic assets would blow out US sovereign debt to $30 trillion, kill the dollar and maybe even lead to an accidental crossing of the streams. Courtesy of his bearded visageness and CNBC.

For a little on Bove's phenomenal procognitive ability to call winners and losers, see below's clip in which Bove is adamant Lehman gets bought few days before it files for chapter.

Both out with rose-colored releases to CNBC: Citi claiming its capital base is strong and it continues to streamline business (coach class tickets likely to be verboten as well soon), while BAC claiming there is no reason to nationalize a bank that is profitable, well-capitalized and has the coolest office furniture this side of Sir Stanford's corner office cum cricket field.

The proud owner of 218 million shares of Citi was down almost $200 million at one point today on his Citi position alone. Luckily he only has another $400 million to lose before the garbage heap becomes a problem of the taxpaying masses, most likely at 5 pm this Sunday.
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The end of the good banker times is here. From elimination of first class airplane seats, to no more $1000 bottles of wine, to car service which actually has to compete based on price, the perks of being a banker are now a fond memory. Full bloomberg article is useful to give an idea of the carnage:

With New York Comptroller Thomas P. DiNapoli forecasting a decline in Wall Street-related activities that may slash tax revenue $6.5 billion by 2010, bankers are being told to cut back.

Citigroup Inc.’s Primerica Financial Services unit canceled a trip for salespeople to the Bahamas, the company said. Deutsche Bank AG outlawed car-service rides above $250, before 10 p.m. and on weekends, according to a company memo. Pricey vintages aren’t popular at Eleven Madison Park, where the 11-course “Gourmand Menu” runs $300 with wine.

‘Things Are Tough’

“No one’s buying the what-the-hell wines,” said John Ragan, beverage manager at the restaurant, which is in the same building as Credit Suisse Group AG. Lunchtime diners used to say “‘Oh what the hell,’ and order a $500 or $1,000 bottle.”

Bowing to the new austerity, Nougatine in the Trump International Hotel & Tower, a stroll from the Central Park West residences of hedge fund manager Daniel Loeb and Goldman Sachs Group Inc. CEO Lloyd Blankfein, introduced a $35 fixed-price dinner, including appetizer, main course and dessert.

Declining Bonuses

The reservations line at the restaurant, where entrees run from $22 to $65, is quiet because “so many people don’t know whether they’re going to have a paycheck,” said Tamara Wood, assistant to Chef Jean-Georges Vongerichten.

Employment in New York’s securities industry fell to 168,600 in December from 187,800 in October 2007, or 10.2 percent, the state comptroller has said. The average bonus declined 36.7 percent to $112,000 in 2008, according to thecomptroller.

Bonuses will be restricted for top officials at companies accepting cash infusions from the Treasury Department, and their salaries will be capped at $500,000 a year.

“I get the new reality,” Citigroup CEO Vikram Pandit testified at a House Financial Services Committee hearing on Feb. 11. Pandit and the CEOs of seven other banks, including JPMorgan Chase & Co.’s Jamie Dimon and Bank of America Corp.’s Kenneth Lewis, were grilled by Chairman Barney Frank and others who said constituents were angry about how banks spent federal aid.

$1,250 a Night

In New York-based Citigroup’s Global Transaction Services unit, employees must book coach seats for most trips, according to a Jan. 27 memo. Business-class travel is only for red-eye flights longer than eight hours for meetings with clients, the memo said. First-class flying is no longer permitted.

At New York-based American International Group Inc., castigated by Congress last year for spending $440,000 on a junket at a California resort days after accepting an $85 billion federal loan, new CEO Ed Liddy sits in coach when he commutes home to Chicago, said spokeswoman Christina Pretto. Former CEO Martin Sullivan’s $677,390 in 2007 benefits included corporate- jet travel, according to a regulatory filing.

Goldman Sachs’s annual hedge fund conference will be in New York, where the company is based, spokesman Ed Canaday said. The March gathering had been scheduled for Miami’s Fairmont Turnberry Isle Resort & Club, which has two 18-hole golf courses and a spa where treatments include a $259 “Four Handed Massage.”

Six Old Handbags

A “handful” of Wall Street firms have canceled events this year at the Breakers, a resort on 140 acres in Palm Beach, Florida, said spokeswoman Bonnie Reuben. Oceanfront rooms list for $1,250 a night.

Personal shopper Barry, who scouts such labels as Yves Saint Laurent, Manolo Blahnik and Giuseppe Zanotti, said her clients sense the mood and don’t want to be vulnerable to criticism. Wives “feel a responsibility to their husbands,” she said. Some tell her, “‘I want to get a new handbag, but guess what, I’m going to get rid of six old ones that I’m no longer using.’”

While Wall Street’s thrift satisfies moralists, it alarms Doron Guez, who said he is firing four of 20 drivers at Eilat New York Limousine International.

“It’s like a cut to the throat,” said Guez, who owns the car service. "The hard worker guy gets too little and the Wall Street people who generate the money and are supposed to protect our money, they walk away with their bonuses."

US CDS mid passes 100 basis points (full market 95/105)...obviously historic event. Some traders call this the doomsday count up as the higher it goes the dumber you have to be to buy it (as you will never collect on any insurance), and the likelier it is that the end of the world is nigh. If this had to be quanitified in terms of colors, the equivalent would be a deep shade of burgundy.
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Law firm Sidley Austin was humiliated today, when Tribune Bankruptcy Judge Kevin Carey publicly chastised Sidley's bankruptcy practice for blatantly representing the stereotype of greedymoneygrubbing lawyers, demanding the highest known legal hourly fee ever of $1,100 per hour and limited the company to a maximum hourly compensation of $925.

Carey stated that any lawyer who tries to charge $1,000 an hour will need to prove he or she is worth that much.

"To the extent that this applicant or any other hits that mark I will require evidence in support of that rate," Carey said.

Bankruptcy law firms have been on a vulture bonanza as they seek to charge exorbitant hourly fees and participate in every bankruptcy case en masse. As we wrote, there ware roughly 513 lawyers involed in the Lehman bankruptcy case alone. In the Lehman case, advisors are expected to collect $1.4 billion, while main restructuring advisor Alvarez and Marsal had charged $400,000/day in its most recent request for compensation approval.

As was discussed previously, the impact of recent $75 billion Homeownership Stability Initiative will most definitely have a very limited impact on improving delinquency and foreclosure statistics. Where before we focused on some theoretical musings, not we present a a more concrete example of why the HSI may impact at most one third of at risk homeowners.

In the current framing of the HSI's $75 billion in proceeds, $44 billion would go toward incentives, leaving $31 billion to fund interest rate reductions. The goal of reducing the targeted borrower universe to a 31% Debt To Income ratio is woefully underfunded based on the $31 billion residual balance. Assuming an average mortgage balance of $200,000 suggests total mortgage debt outstanding impacted would be $800 Billion, which is about a third of the $2 trillion of estimated "at risk" mortgages. $80 billion dedicated to interest rate reduction is the minimum amount needed for the plan to even have a theoretical chance of succeeding.

The figure below presents why the cost of incentives for 4 million borrowers with a loan mod plan under the Homeowner Affordability and Stability Pact would cost $44 billion over 5 years. As in the time period many of these borrowers will become delinquent the final cost will likely end up being lower.

The next analysis presents the case of a $26 billion cost of loan modifications over five years. Additionally, the analysis is based on the government's subsidizing of half the cost of reducing DTI from 38% to 31%, but there is no accounting for where the incremental cash would come to lower the 45% DTI to 38% in the first place, which is where the 4 million borrowers are currently from a DTI standpoint.

Cumulatively, assuming 4 million borrowers on the program and an average $200,000 mortgage balance, the program would cover $800 billion in mortgages, or a third of $2 trillion in at risk mortgages.

A few tightening names, curious among these Ladbrokes which with its toxic Hilton Hotel contingent liability exposure is due for a major push wider. AIG leads the blow out parade, 75 bps wider, followed by a whole slew of banks. Today won't be any different. In sovereigns, US risk is about to surpass Japan.

Japanese rumor of the day - most Shinsei executives received their marching orders today with only few receiving option to stay. At least one trading head who was among the latter, decided to exit and get deferred bonus money ahead of likely upcoming merger with Aozora which would likely reprice exit equity much lower. Probably not good news for Aozora main stakeholder Cerberus.
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Yet another soap opera is developing. Yellowstone Club, near Big Sky, Montana, which during the good times used to be the ultra-exclusive and ultra-expensive escape of a select few such as Bill Gates, Dan Quayle, Bob Greenhill, Steven Burke and Peter Chernin, is becoming the hotbed for one of the most acrimonious luxury resort legal battles in modern history. Its secluded location, away from traditional winter resorts, such as Aspen and Telluride, meant it would draw in the rich crowd with such requirements as a $320,000 initiation fee, $5 to $25 million property purchases and $18,000 in annual dues. The club had opened in 1997 and its centerpiece used to be the still unfinished $100 million Warren Miller Lodge, after the ski-film maker, who is an honorary board member. A little more on the curious perks for guests:

Like the club itself, the lodge is chock-a-block with underutilized amenities, from a caviar bar (where a single serving can cost up to $350) to reading nooks with overstuffed leather couches next to plates of untouched fresh-baked cookies. The empty restrooms are marble-lined and stocked with L'Occitane products. Up an imposing curved staircase and down a long wood-paneled hallway - replete with big-game taxidermy - is the lodge's main dining room. On a December afternoon, as Blixseth gives a guided tour, the bright Montana sun streams through the room's huge windows, which look out onto the slopes of Pioneer Mountain, where the vertical drop is 2,700 feet. A high-speed Doppelmayr covered chairlift continually deposits its empty payloads at the peak. Below the lift an occasional skier carves through the powder on trails named Learjet Glades, Sunset Boulevard, and Ebitda.

When the economy went sour, things promptly worsened for the resort, and Yellowstone filed for bankruptcy in November 2008 after it failed to secure funding for an expansion as well as some other curious improprieties by its owner Tim Blixseth, and his estranged wife Edra Blixseth.

In a disclosure statement filed in bankruptcy court, Yellowstone notes that most of the $375 million in cash that Credit Suisse had provided in the form of secured financing in 2005, had been diverted directly to Tim, who channeled $208 million of this money in the form of a dividend to himself.

“The overwhelming evidence is that Credit Suisse and Mr. Blixseth knew and intended at the time that they were essentially converting an equity interest that was junior in priority into an alleged secured claim that is now senior in priority,” court documents filed by the debtor on Feb. 13 said.

The plan further warns of numerous potential lawsuits related to the CS loan, implying that Blixseth, who once was a huge fan of Gulfstream IVs and owned various multi-million dollar homes all over the country, may be stuck in litigation purgatory for a long time. And litigation will come not only from creditors who will claim he illegally diverted secured funding, but also from the IRS, and also his wife, Edra, who curiously ended up owning Tim's 50% stake of the club as part of their divorce settlement. Edra, herself may also be in hot water, as Western Capital, which is suing Yellowstone for a $13 million loan, sought a warrant for her arrest on Wednesday after she failed to appear at a district court hearing.

In the meantime, private equity group CrossHarbor Capital, is hoping to take advantage of the smoke from all the scandals related to the property and acquire it at a low ball bid. The asset manager loaned Yellowstone a $22.6 million DIP in exchange for being a stalking horse bidder in the ensuing 363 auction for the property. Lender Credit Suisse, which figured out the low-ball bidding ploy, has sought and obtained the appointment of an examiner who will investigate conflilcts of interest between CrossHarbor, Edra Blixseth and others. CS lawyers are arguing the parties are working to try to hand the company to CrossHarbor for an extremely low price at the expense of creditors. In response, Yellowstone recently hired C.B. Richard Ellis to market the resort to a wider investor audience.

Any funds out there who wish to position themselves for that one moment 20 years down when the economy picks up to where people can afford Yellowstone's exorbitant fees, should swing by bankruptcy court on the day of the auction and keep outbidding CrossHarbor at every turn. In the meantime the lack-of-love pentagram between Tim, Edra, Credit Suisse, CrossHarbor, the IRS, and likely many more as yet unknown litigants should provide hours of entertainment to former millionaires who now live in the slums.

We believe in cross collaboration, especially with smart, insightful bloggers. Today we focus on TraderMark who runs Fund My Mutual Fund, and is one of the most followed authors on Seeking Alpha; we have picked a post of his on a topic that is near and dear to our heart.

The following is a guest post by TraderMark of Fund My Mutual Fund. His blog focuses on economic, market, and stock specific ideas - he is running a mock mutual fund with his investment ideas outlined in transparent fashion with hopes of attracting readers to help launch a real mutual fund in the future.

The case of the incredibly shrinking hedge fund asset base continues - from a peak of $1.9 Trillion in May 2008, we're now down to below $1 Trillion. I'd love to know the last time assets were below $1 Trillion. In my November 2008 Roadmap/Thoughts piece I wrote

#4 Hedge Funds/Investing - As stated already I expect at least 1/3rd of hedge funds to be gone either by choice or by their investors decision within a year.

Hedge-fund investors withdrew $74 billion in January as the economy worsened and equity markets fell, according to a report from TrimTabs Investment Research. The withdrawals were the second highest on record, after $117 billion of outflows in December, the Sausalito, California- based firm said. Investors have pulled $315.6 billion from hedge funds since September, according to data compiled by TrimTabs.

Investment losses and redemptions reduced hedge-fund assets to $964 billion as of Jan. 31 from $1.9 trillion in May, TrimTabs said. Customers removed money from 13 of 14 fund categories, led by $20 billion in outflows from those that invest in companies going through events such as takeovers.

Hedge funds are looking to consolidate after record investment losses and customer withdrawals cut assets by 37 percent in the second half of 2008, squeezing their main source of fees. As many as 40 percent of the 9,000 hedge funds and funds of funds may disappear in the next two years, according to Karamvir Gosal, a New York-based investment banker at Jefferies Putnam Lovell.

While some will return money to investors and shut their doors, mergers and acquisitions will be more prevalent than in the past.

“The entire industry is under tremendous pressure to improve performance, reduce costs and manage the downturn,” Axiom’s Syed said. “The main problem is finding quality fund managers who have a demonstrable edge.”

Hedge funds haven’t traditionally been involved in M&A because many managers enjoyed the independence of running their own businesses as fees rose along with client assets, according to James Abbott, a partner at New York-based law firm Seward & Kissel LLP, whose clients include 400 hedge-fund firms. “Many had made the decision to leave bigger organizations to run smaller businesses in the first place,” he said. “The attraction to merge with others just wasn’t there as many funds were doing so well or at least generating a mediocre performance.”

And as long as you lever up on mediocre performance in the days of easy money and easy credit you can make serious dough.

“The nature of the transactions is going to change this year,” said Elizabeth Nesvold, managing partner at Silver Lane. “Many combinations will be based on the need for survival. There’s a complete reversal in attitude. Some managers who had no interest whatsoever in having conversations with anyone else a year ago have been so humbled by this market environment that they’re willing to consider talking now.”

Smaller funds, with $1 billion or less in assets, are in trouble, said Jefferies’ Gosal. “They need to ask if the business model is sustainable without performance fees. Many will find it challenging to operate profitably.”

James Pallotta and Christopher Pia, hedge-fund managers who recently struck out on their own, are discovering just how much the global financial crisis is reducing investors’ appetite for risk.

Pallotta, who split from Tudor Investment Corp. last month, and Pia, who spent 13 years managing money for Moore Capital Management LLC, probably will raise about $500 million apiece this year, according to brokers who provide loans and administrative services to hedge funds.

Well I guess it's all relative, $500 Million isn't too shabby at least from this vantage point...

Whether it’s a big-name manager like Boston-based Pallotta or a newcomer, that threshold will be harder to cross this year than in the boom of 2002 through 2007. “The days of the multibillion-dollar mega-launches are over,” said Larry Chiarello, director of research at Red Bank, New Jersey-based Riverview Alternative Advisors LLC, which farms out money to hedge funds.

The record for $1 billion-plus fund startups was set in 2005, when 13 managers pulled in a combined $19 billion, according to Morgan Stanley.

Aleris, which filed for bankruptcy a week ago and had a $1.575 billion DIP in place, has seen the DIP get hammered in the secondary market to a low of 77 bid earlier today, after allocating yesterday. Unlike an ISDA auction, DIPs, especially purchased in the secondary market, seem a guaranteed way to part with capital in a very rapid timeframe. The incremental selling pressure on the DIP is due to numerous existing prepetition holders who subscribed in order to obtain roll up rights on their nearly worthless holdings (pre-petition loan priced at 6 today), hoping to make them less worthless. After holders got their allocations and pro rata rollup, they ended up stuck with even more useless paper, thereby generating a frenzy of offers in the market.

Funds that had some extra money lying around and put it into the DIP, now don't have any extra money, and are cursing both the concept of DIPs and Deutsche Bank who served as DIP loan arranger and administrative agent. Zero Hedge is still kinda interested where private equity sponsor Aleris has its equity maked in the name.

Presumably arrested although sources are unclear... maybe arresting FBI agents were on the political contribution list and looked the other way for 30 seconds.

Apparently Sir Allen was found in Fredericksburg with a "girlfriend." We assume this girlfriend must have been truly retarded, drunk, and/or bribed, not to notice that she is hanging out with the most wanted criminal in the world. Also there is no definiteve evidence if she was one of the "girlfriends" pictured here, who almost caused an international scandal and the royal thrasing of Sir Stanford by the entire UK cricket team.

The auction's final closing price was curious as this was the first time in ISDA auction history where the midpoint was lower than the final clearing price. The high final price was a factor of several significant bids at 8.875, most notably $100 million by Barclays which scooped up almost 80% of the entire $128 million auction. As the auction was relatively smaller than Nortel and of course Lehman, it may be not truly indicative of trending datapoints, nonetheless here are the conclusions. Barclays, JP Morgan, and Goldman are still the only truly active desks (and/or B/D with legitimate hedge funds clients that have the liquidity to put in limit bids). Deutsche Bank, Citi, UBS, BofA and Credit Suisse continue posturing, unable to provide any even remotely relevant bids and merely bidding for the sake of bidding, which is due either to lack of trade desk capital or no hedge fund accounts who they could convince to bid in context. Most amusing is Citi 100 million bid at 0.5 which doesn't even deserve a comment.

The fallout from Citadel's nebulous future is spreading. Russki Algo trading genius Misha Malyshev, who was classified as Citadel's Head of High-Frequency Trading, and who was responsible for some of the only profits at Citadel last year, generating 40% returns for the two funds under his control has left the firm. His gains paled when compared to the 55% losses by the two biggest funds, Kensington and Wellington. This was also likely an issue when calculating his "bonus" and his eventual career decision. It is unclear as of yet where Misha has resumed trading at a high frequency. The high-frequency trading group at Citadel is (or rather was) part of the Capital Markets group, headed by Rohit D'Souza who was poached from Merrill last year, and manages about $2 billion. Will be curious who, if anyone, will be dragged in to replace the stern looking Misha.

Hedge Fund Alert reports that, as expected, more large hedge funds are following Ken Griffin's example and are reversing the course on suspending redemptions. Some of the larger names that are starting to let investors get their much needed if significantly reduced cash are Fortress, Threadneedle and Tudor.

Fortress blocked redemptions from its flagship Drawbridge Global Macro Fund in December, telling investors at the time that they would get 72% of their requested withdrawals by April. But on Jan. 22, the New York firm moved up the timetable, promising investors they would get the 72% back this month, subject to a 10% hold-back pending a final audit. The remaining 28% of assets that the investors sought to redeem — representing illiquid investments — has been put into a side pocket to be paid out over 18 months.

Threadneedle told investors last week that it will now honor redemptions from its Threadneedle Emerging Debt Crescendo Fund. The announcement came three months after the London firm said it was suspending withdrawals. The fund, which invests in emerging-market debt, had $131.5 million of assets at yearend. It suffered a miserable October that contributed to a 19.4% loss for the year.

Tudor shocked the industry in November when it suspended redemptions from its flagship Tudor BVI Global Fund and divided the vehicle into two funds, one containing its liquid assets and the other its illiquid holdings. The vehicle had $9.8 billion under management at yearend, and was down about 4.5% for 2008.

Tudor also eliminated a clause that would have permitted the fund’s managers to set a 25% limit on redemptions from the liquid fund, for any reason. Now, Tudor won’t invoke a“gate provision” for any reason.

The ploy of suspending redemptions has likely come to an end as hedge funds, in typical short-sighted approach to everything, saw an up January and decided that investors will be placated by an up 2-3% and will cancel previous redemption requests. However, with the market continuing to flounder and hedge funds likely set to post a very bloody February, this could prove a costly mistake, as it is likely to accelerate the forced selling of more and more liquid and illiquid assets as natural bids disappear from the market.
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As the Dow drops below the so called November test, Hogan's bottom etc., Nouriel is stoking the fire:

"The process of socializing the private losses from this crisis has already moved many of the liabilities of the private sector onto the books of the sovereign,” Roubini wrote on his Web site today. “At some point a sovereign bank may crack, in which case the ability of the governments to credibly commit to act as a backstop for the financial system -- including deposit guarantees -- could come unglued."

The one man systemic wrecking crew also sees a 30% chance of an L-shaped near depression without appropriate and aggressive policy action by the U.S. and major foreign economies.

"The global economy is now literally in free fall as the contraction of consumption, capital spending, residential investment, production employment, exports and imports is accelerating rather than decelerating,” Roubini said.

The protracted downturn Roubini warned of can only be prevented by “a strong, aggressive, coherent and credible combination of monetary easing (traditional and unorthodox),fiscal stimulus, proper clean-up of the financial system and reduction of the debt burden of insolvent private agents(households and non-financial companies),” he said.

The Center for Responsive Politics has come out with an insightful list, disclosing Stanford's campaign contributions which shockingly demonstrates that R. Allen Stanford was president Obama's third largest donor.

Turns out Stanford was a big Democrat, giving almost a million to the Democratic Senatorial Campaign Committee.

Overall, Stanford spent $7.2 million on campaign donations and lobbying expenses since 1999. The company also ferried lawmakers on corporate jets, including former House Majority Leader Tom DeLay of Texas, a Republican who received $20,100 in Stanford campaign donations, and former Representative Robert Ney of Ohio, a Republican who received $28,200.

Once the fraudulent conveyance implications kick in it will be amusing to see all these congressional members refund the ill-gotten cash. And we can't wait to hear Chris Dodd's take on things... after all he is so concerned about compensation propriety these days.
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Or Geithner and 51,999 (we jest Timmmmay). The U.S. government has filed suit in Miami alleging that U.S. customers have failed to pay taxes on 32,000 cash accounts and 20,000 securities accounts, which held $14.8 billion of assets in the mid-2000s, according to a Justice department statement. John DiCicco assistant attorney general said "At a time when millions of Americans are losing their jobs, their homes and their health care, it is appalling that more than 50,000 of the wealthiest among us have actively sought to evade their civic and legal duty to pay taxes."

Looks like the government is serious about this one. In the meantime, leakage of the list of tax-evaders is sure to be attracting significant bids from popular media outlets.
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No major surprises in SSCC's ISDA CDS and LCDS auctions. Creditex has determined the inside market mid-point for CDS at 7.875% while the LCDS mid is 68.5. Both points are consistent with recent trading levels of 68-70 for the loans and 7.75 - 9 for the bonds.

Net sell interest into determination of the final price is $128.675 million for the bonds and $40 million for the loans.

Final auction results will be made available around 2 pm and we will give you the full lowdown.
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After seemingly endless years of wrangling back and forth, Einhorn has finally been vindicated: Allied Capital announced in an 8K today that it was notified by its lenders of a default in its credit facility, an event which will severely hamper the company's liquidity, and is the first step on the road to Allied's utter annihilation. From the 8K:

The administrative agent for the revolving credit facility has notified the Company that an event of default has occurred pursuant to the revolving credit facility. An event of default under the revolving credit facility constitutes an event of default under the private notes.Neither the lenders nor the noteholders have accelerated repayment of the Company’s obligations; however, the occurrence of an event of default permits the administrative agent for the lenders under the revolving credit facility, or the holders of more than 51% of the commitments under the revolving credit facility, to accelerate repayment of all amounts due, to terminate commitments thereunder, and to require the Company to provide cash collateral equal to the face amount of all outstanding letters of credit. Pursuant to the terms of the private notes, the occurrence of an event of default permits the holders of 51% or more of any issue of outstanding private notes to accelerate repayment of all amounts due thereunder. Acceleration of the amounts outstanding under the revolving credit facility or any issue of the private notes could have a material adverse impact on the Company’s liquidity, financial condition and/or results of operations.

The existence of an event of default restricts the Company from borrowing or obtaining letters of credit under its revolving credit facility, and from declaring dividends or other distributions to its shareholders.

One could construe this as a rather ominous sign to other BDCs including American Capital and Apollo Mezzanine.

After almost a week of not showering, and snoring in a sleeping bag, one California Republican Senator seems to have cracked and will vote against his conscience, but for going home and a fresh change of clothes. Abel Maldonado is essentially sacrificing his political career and is making sure he will go back to his roots in strawberry farming. Also, Abel will bear the collective wrath of millions of Californians who will forever see him as the traitor responsible for their taxes going from highest in the country to even highest-er in the country. After the proposal passes, state sales tax would 8.25% from 7.25% and boost vehicle license fees to 1.15% from 0.65% of the car value; ironically both measures are likely to be totally useless measures in dealing with the $42 billion deficit.

Despite his humble farming roots, the Republican seems to realize the implication of his actions:

"This could be a career-ender for me,” he told reporters in the Senate chamber in Sacramento, where a vote is scheduled today. “In difficult times, you need to step up to the plate."

Betraying your electorate to get a replacement shirt is truly difficult times. So just what was the Sacramento equivalent of 30 pieces of silver?

To secure Maldonado’s support, Democratic leaders decided to take up government overhaul measures he sought, including a plan to create open primaries where Republicans and Democrats are free to select in which party’s election they want to vote. It would also need to be approved by state voters.

The agreement brokered with Maldonado hit an early snag when the there was insufficient support to approve his constitutional amendment that would change how primary elections are held. Votes were taken on that measure in the middle of the night, ahead of the tax-increase plan.

Good thing Abel does not know the names of CIA assets in Mexico or elsewhere in the world. Something tells me he would not hold up too long under interrogation.
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A comparable relative value analysis evaluating spreads on most liquid loans and bonds for 30 indicative corporate issuers yields interesting results. The average loan yield is currently at Libor +848 while the average bond spread is at Libor + 1435, a 587 bps differential, and a 230 bps widening to the LTM average of 358 bps.

Outlier companies with the widest differentials between the secured and the unsecured tranches are TRW at 2600 bps, Neiman Marcus at 1256 bps, and Huntsman at 1154 bps, while tightest are PanAmSat at 83 bps, Rock-Tenn at 91 bps and Vanguard Health at 99 bps. Some very curious names are Invista and Alliance Imaging, whose term loans trade wider than their bonds, presenting an immediate cap arb negative basis opportunity (loan - bond convergence trade).

A preliminary observation is that a very wide differential between the tranches indicates the increased probability that the fulcrum security is the secured (loan) vs the unsecured (bond) tranche in case of a restructuring/liquidation, and inversely for tight differentials.

Larry Gluck and Stellar LLC who had hoped to auction off the Riverton Harlem housing project on Friday, got some more bad news today, when Wells Fargo announced it is seeking foreclosure on the 1,230 unit apartment complex. The auction has now been cancelled until further notice according to Steve Solomon, a spokesman for Gluck. Wells, which has problems of its own with its stock hitting an all time low of $12.06 today, is custodian for a bunch of illiterate CMBS investors who bought into the Riverton property several years ago. Now they are stuck with major losses on the property behing the loan, originally evaluated at $340 million. The bank has asked New York State Supreme Court to order the properties to pay $225 million in principal plus interest, fees and late charges. Good luck collecting, seeing as the property had been scheduled to be auctioned off on February 20 for about $196 million. According to Andy Day a CMBS guru at MS, the Riverton complex may appraise for "substantially less" than $196 million. The case is actively followed as it will serve as a benchmark for a true market test of the atrocious state of New York commercial real estate.

Whoodathunkit. The fashion company actually has debt... And not just any debt, but rapidly maturing one at that. BCBG has a $20 million loan payment in March which is very unlikely it will be able to make. Things are so bad even S&P came out of its rat hole and downgraded the company to CCC+

Quote S&P:

"We are very concerned with BCBG's liquidity position. The company had $20 million available in cash and its revolving credit line in early January, however it also has a $20 million loan payment due in March."

"Declining sales at Max Rave, which BCBG acquired in 2006, is also likely to push the subsidiary to break minimum earnings before interest, taxes, depreciation and amortization (EBITDA) terms in its loan agreements."

"We do not expect Max Rave to meet its minimum EBITDA covenant. This does notconstitute an immediate event of default but could prove distracting for management. The 2006 acquisition of the Max Rave business added to the company's business risk and it continues to underperform because of negative sales trends."

For all hedge funds trying to DIP their finger into something saucy look no further (wink wink Aladdin). A wacky owner who loves dancing on couches, Fashion week passes for life, models everywhere, and a modest amount of money ahead of a potential loan-to-own. This should pass any investment committee.